Iraq: Oil Prices Plunge as Kirkuk's Production Comes Back on Line

Iraq's federal government and the Kurdistan Regional Government have squabbled over oil revenue and resources for years, and they are still not cooperating. As Iraq's oil production continues to increase, the OPEC member is adding more oil to a market that has already overcompensated for sanctions on Iran. Going forward, Iraq's increased production will give Saudi Arabia more reason to push for another global cut in production.

What Happened

Rising supply has caused oil prices to plunge in the past seven weeks. And thanks to Iraq, that growth in supply will not let up. On Nov. 16, a temporary deal between Iraq's federal government and the Kurdistan Regional Government (KRG) enabled the export of oil from the disputed province of Kirkuk through the Kurdistan-Turkey pipeline for the first time since June 2017. For now, the amount of oil is about 50,000 barrels per day (bpd), but the deal aims to boost it to 100,000 bpd. However, if Kirkuk's export levels return to normal, then 200,000 to 400,000 barrels of Iraqi oil could make its way to export markets each day.

Background

Baghdad's new deal comes after oil prices have taken a beating. Brent crude peaked above $86 per barrel in early October, but the price has since fallen to below $70 per barrel after the U.S. decision to issue waivers for many countries to continue purchasing Iranian oil. Moreover, U.S. pressure on Saudi Arabia has caused Riyadh to increase its output. These developments have prompted OPEC and non-OPEC countries — which cut production in 2017 to fend off low oil prices — to discuss cutting output yet again.

Saudi Arabia has realized that it may have jumped the gun in increasing production before U.S. sanctions on Iran took effect, and now it must correct course. On Nov. 11, Saudi Energy Minister Khalid al-Falih said his country would reduce exports by 500,000 bpd, and the next day he said a global production cut of 1 million bpd would be needed. The more Iraqi oil that Arbil's agreement with Baghdad brings on line, the more pressure will mount for that production cut to be higher — and for Baghdad itself to make greater cuts. As the market fluctuates, businesses and individuals should watch the next OPEC meeting in Vienna on Dec. 6 for signs of a cut.

Why It Matters

Despite the increasing oil flow, many of the underlying issues between Iraq's federal government and the KRG remain unresolved. Because of this, another disruption is possible down the road unless the two sides can agree on who is granted ownership of the oil produced in Iraq's Kurdistan region under the country's 2005 constitution.

Before 2014, Baghdad had tremendous leverage over the KRG because, unlike Arbil, the federal government controlled its own pipeline, as well as Kurdish access to it. However, the Islamic State destroyed the Kirkuk-Ceyhan pipeline in 2014, the same year Arbil completed its own pipeline to Turkey that bypassed Baghdad's. Since then, the KRG has had the upper hand, and its pipeline has given it the freedom to export oil through Turkey without Baghdad's interference (as long as the KRG is in Turkey's good graces). Iraq's government is hoping to rebuild the Kirkuk-Ceyhan pipeline now that the Islamic State has been dislodged from Mosul and northern Iraq, but Baghdad's leverage over the Kurdish energy sector is limited as long as the KRG maintains is relations with Turkey and its control over the country's oil infrastructure.